E-Commerce

Selling to Businesses

B2B e-commerce is the type of e-commerce that deals with relationships between and among businesses.

Learning Objectives

Explain the impact of technological advances on business to business (B2B) commerce

Key Takeaways

Key Points

  • About 80% of e-commerce is of this type, and most experts predict that B2B e-commerce will continue to grow faster than the business to consumer (B2C) segment.
  • E-frastructure is the architecture of B2B, primarily consisting of logistics, application service providers, outsourcing of e-commerce functions, auction solutions, content management software, and Web-based commerce enablers.
  • E- markets are simply defined as Web sites where buyers and sellers interact with each other and conduct transactions.
  • Impacts of B2B e-commerce on the economy in general are evident in transaction costs, disintermediation, transparency in pricing, and economies of scale and network effects.

Key Terms

  • outsourcing: The transfer of a business function to an external service provider.
  • e-commerce: Commercial activity conducted via the Internet.

Business to business (B2B) e-commerce is simply defined as e-commerce between companies. This is the type of e-commerce that deals with relationships between and among businesses. About 80% of e-commerce is of this type, and most experts predict that B2B e-commerce will continue to grow faster than the business to consumer (B2C) segment. The B2B market has two primary components: e-frastructure and e-markets. E-frastructure is the architecture of B2B, primarily consisting of a number of subcategories:

  • Logistics: transportation, warehousing and distribution
  • Application service providers: deployment, hosting and management of packaged software from a central facility
  • Outsourcing of functions in the process of e-commerce, such as Web-hosting, security and customer care solutions
  • Auction solutions software for the operation and maintenance of real-time auctions in the Internet
  • Content management software for the facilitation of Web site content management and delivery
  • Web-based commerce enablers

E-markets are simply defined as Web sites where buyers and sellers interact with each other and conduct transactions.

The more common B2B examples and best practice models are IBM, Hewlett Packard (HP), Cisco, and Dell. Cisco, for instance, receives over 90% of its product orders over the Internet. Most B2B applications are in the areas of supplier management (especially purchase order processing), inventory management (i.e., managing order-ship-bill cycles), distribution management (especially in the transmission of shipping documents), channel management (i.e., information dissemination on changes in operational conditions), and payment management (e.g., electronic payment systems or EPS).

Impacts of B2B e-commerce on the economy in general are evident in a number of areas:

  • Transaction costs: There are three cost areas that are significantly reduced through the conduct of B2B e-commerce. First is the reduction of search costs, as buyers need not go through multiple intermediaries to search for information about suppliers, products, and prices as in a traditional supply chain. In terms of effort, time, and money spent, the Internet is a more efficient information channel than its traditional counterparts. In B2B markets, buyers and sellers are gathered together into a single online trading community, reducing search costs even further. Second is the reduction in the costs of processing transactions (e.g. invoices, purchase orders and payment schemes), as B2B allows for the automation of transaction processes and, therefore, the quick implementation of the same compared to other channels (such as the telephone and fax). Efficiency in trading processes and transactions is also enhanced through the B2B e-market’s ability to process sales through online auctions. Third, online processing improves inventory management and logistics.
  • Disintermediation: Through B2B e-markets, suppliers are able to interact and transact directly with buyers, thereby eliminating intermediaries and distributors. However, new forms of intermediaries are emerging. For instance, e-markets themselves can be considered intermediaries because they come between suppliers and customers in the supply chain.
  • Transparency in pricing: Among the more evident benefits of e-markets is the increase in price transparency. The gathering of a large number of buyers and sellers in a single e-market reveals market price information and transaction processing to participants. The Internet allows for the publication of information on a single purchase or transaction, making the information readily accessible and available to all members of the e-market. Increased price transparency has the effect of pulling down price differentials in the market. In this context, buyers are provided much more time to compare prices and make better buying decisions. Moreover, B2B e-markets expand borders for dynamic and negotiated pricing wherein multiple buyers and sellers collectively participate in price-setting and two-way auctions. In such environments, prices can be set through automatic matching of bids and offers. In the e-marketplace, the requirements of both buyers and sellers are thus aggregated to reach competitive prices, which are lower than those resulting from individual actions.
  • Economies of scale and network effects: The rapid growth of B2B e-markets creates traditional supply-side cost-based economies of scale. Furthermore, the bringing together of a significant number of buyers and sellers provides the demand -side economies of scale or network effects. Each additional incremental participant in the e-market creates value for all participants in the demand side. More participants form a critical mass, which is key in attracting more users to an e-market.
image

B2B E-Commerce: E-commerce has become so prevalent in today’s business world that multiple conferences are held each year — like this one pictured in the UK.

Selling to Consumers

B2C e-commerce involves customers gathering information and purchasing either physical or information goods over an electronic network.

Learning Objectives

Explain how technological change has transformed the business-to-consumer (B2C) industry

Key Takeaways

Key Points

  • Information goods include electronic material or digitized content, such as software or e-books, and can be delivered over an electronic network.
  • The more common applications of this type of e-commerce are in the areas of purchasing products and information, and personal finance management, which pertains to the management of personal investments and finances with the use of online banking tools.
  • B2C e-commerce reduces transactions costs (particularly search costs) by increasing consumer access to information and allowing consumers to find the most competitive price for a product or service.
  • B2C e-commerce also reduces market entry barriers since the cost of putting up and maintaining a website is much cheaper than installing a “brick-and-mortar” structure for a firm.
  • C2C e-commerce is characterized by the growth of electronic marketplaces and online auctions, particularly in vertical industries where firms/businesses can bid for what they want from among multiple suppliers.

Key Terms

  • distribution: The process by which goods get to final consumers over a geographical market, including storing, selling, shipping, and advertising.

Business-to-consumer (B2C) e-commerce, or commerce between companies and consumers, involves customers gathering information; purchasing physical goods (i.e., tangibles such as books or consumer products) or information goods (or goods of electronic material or digitized content, such as software or e-books); and, for information goods, receiving products over an electronic network. It is the second largest and the earliest form of e-commerce. Its origins can be traced to online retailing (or e-tailing). Thus, the more common B2C business models are the online retailing companies such as Amazon.com, Drugstore.com, Beyond.com, Barnes and Noble, and Toys-R-Us. Other B2C examples involving information goods are E-Trade and Travelocity.

The more common applications of this type of e-commerce are in the areas of purchasing products and information, and personal finance management, which pertains to the management of personal investments and finances with the use of online banking tools (e.g., Quicken). Online retailing transactions make up a significant share of the B2C e-commerce market.

B2C e-commerce reduces transactions costs (particularly search costs) by increasing consumer access to information and allowing consumers to find the most competitive price for a product or service. B2C e-commerce also reduces market entry barriers since the cost of putting up and maintaining a website is much cheaper than installing a “brick-and-mortar” structure for a firm. In the case of information goods, B2C e-commerce is even more attractive because it saves firms from factoring in the additional cost of a physical distribution network. Moreover, for countries with a growing and robust Internet population, delivering information goods becomes increasingly feasible.

Another form of e-commerce involving selling to consumers is known as consumer-to-consumer (C2C). It is simply commerce between private individuals or consumers. This type of e-commerce is characterized by the growth of electronic marketplaces and online auctions, particularly in vertical industries where firms/businesses can bid for what they want from among multiple suppliers. It perhaps has the greatest potential for developing new markets.

This type of e-commerce comes in at least three forms:

  1. Auctions facilitated at a portal, such as eBay, which allows online real-time bidding on items being sold in the Web
  2. Peer-to-peer systems, such as the Napster model (a protocol for sharing files between users used by chat forums similar to IRC) and other file exchange and later money exchange models
  3. Classified ads at portal sites such as Craigslist (an interactive, online marketplace where buyers and sellers can negotiate and that features “Buyer Leads & Want Ads”)
image

B2C E-Commerce: B2C e-commerce makes up a smaller portion of the market share of e-commerce compared to B2B, and appears to be shrinking in comparison.